Distribution

1
Distribution

• Whose point of view is considered?
• Intermediaries--functions
• Intermediaries--structures and their
  justifications
• Channel power
• Cross-national variations
• Selectivity of distribution--do we want our
  product available at K-Mart?
• Parallel Distribution Structures
• Diversion

2
Mini Case Study The Roasted Chicken That Didnt
Sell

• Manufactured offered pre-roasted chickens to
  stores too small to warrant in-store rotisserie
• This product should appeal to time squeezed
  customers
• Taste tests showed that consumers liked the
  product
• HOWEVER, sales were disappointing. Why?

3
Intermediaries Adding Value
WHOLE- SALER (or agent) 1
MANUF. 1
RETAILER
MANUF. 2
WHOLE- SALER (or agent) 2

• Value added
• breaking bulk
• consolidating supplies
• holding inventory

MANUF. 3
PRODUCTS FROM OTHER MANU- FACTURERS.
4
Potential Channel Structures (U.S.)
Farmer
Farmer
Farmer
Farmer
Agents/ Brokers
Manufacturer
Wholesalers
Wholesalers
Retailers
Retailers
Retailers
Consumer
Consumer
Consumer
Consumer
5
Some Other Intermediaries

• Processors
• Co-ops

FERTILIZER MANUFACT.
FERTILIZER SELLER
6
Other Issues

• Can you make money on eliminating the
  middleman? It depends
• How efficient is the existing distribution
  channel?
• International variations
• Some structures are less well developed
• Tradition may govern structure
• Power--who needs whom most?

7
Types of Wholesalers and Substitutes for Food
Products

• Agents and brokers (do not take possession)
• Manufacturers sales branches
• General
• Full service
• Limited service
• Cash n carry
• Specialty
• Retailers distribution centers

8
Approaches to DistributionManufacturers
Perspective

• These strategies require tradeoffs
• Wide--essential to low involvement goods
• Selective--desire to maintain image
• Exclusive--very high prestige needed or very high
  service requirements

Admission By INVITATION ONLY
9
Constraints on Distribution Opportunities
Product Type Distribution Options
Major brand standard convenience good Intense distribution (limiting distribution would mean forfeiting brand status)
Upscale brand convenience good Intense distribution possible but not appropriate selective preferred
Minor brand convenience good National regional intense distribution unrealistic local or invited national distribution
Major brand shopping good Moderately intense distribution (e.g., TVs in discount store)
Premium brand shopping good Moderately intense distribution inappropriate selective distribution
Minor brand shopping good National moderately intense distribution unrealistic local or invited national distribution
Niche brand Selective distribution
10
Manufacturer and Retailer Distribution Interests

• Full service retailers tend dislike intensive
  distribution
• Low service channel members can free ride on
  full service sellers
• Manufacturers may be tempted toward intensive
  distributionappropriate only for some may be
  profitable in the short run
• Market balance suggests a need for diversity in
  product categories where intensive distribution
  is appropriate
• Service requirements differ by product category

11
Parallel Distribution Structures
MANUFAC- TURER
DISTRI- BUTOR
RETAILER
MAJOR CHAIN (e.g., Wal-Mart)
DIRECT MARKETING
FACTORY OUTLET
12
Diversion

• Products often end up where manufacturers did not
  intend them to go
• Trade promotions in one region

13
Types of Retailers

• Supermarkets
• High service
• Low service
• Superettessmall grocery stores
• Convenience stores
• Specialty
• Stores with food as secondary products
• Gas stations
• Discount stores
• Online
• Restaurants (47 of consumer food expenditures)

14
Characteristics of U.S. Supermarkets

• 20,000-80,000 SKUs (product variationse.g., 4 oz
  Dannon light raspberry yogurt)
• Average gross margin 20-25 (probably
  decreasing)
• Average net margin 1-3
• 20 of SKUs may sell less than one case per
  month!
• Location is most important variable for consumers
  but price competition is still intense!
• Wheel of Retailing

15
Wheel of Retailing
BARE BONES RETAILERS ENTER TO SERVE PRICE
SENSITIVE CONSUMERS
CUSTOMERS DEMAND MORE SERVICES
RETAILERS ADD MORE SERVICES AND RAISE PRICES
16
Category Management

• Retailer tries to maximize profits from a given
  product category (e.g., cola drinks) rather than
  for brand (e.g., Coca Cola)
• High cross-price elasticity
• Additional gains by putting one brand on sale
  will be nearly cancelled out by losses from
  switchers from other brands
• Increasing enforcement ability of manufacturers
  due to scanner technology

17
Slotting Fees

• Retailers may charge fees to retailers to stock
  their products
• New products
• Slow moving products
• How fair is this?
• Does this actually raise the price paid by
  consumers?
• Additional concessions gained from manufacturers

18
Micro-Segmentation

• Adapting individual stores in chain to local
  conditions based on statistical analysis of
  scanner data
• Brute force analysis of sales volumes in store
  may reveal effects of
• Ethnic or other demographic characteristics of
  the location
• Seasonal patterns
• Geographic location (e.g., near beach)

19
More Scanner Data Analysis

• Store placement of products
• Based on correlated products
• Multiple placement within the same store
• Effects of promotional strategies
• Product placement
• Price promotion
• Coupons
• Advertising

20
Margins

• Margins
• Gross sale price - price paid to wholesaler
• Per unit
• Per dollar
• Per unit of space
• Net margin gross margin vs. allocated overhead

• Very large increases in sales volumes are needed
  to break even on low prices

21
Positioning Issues

• Some generic profit strategies
• Sell large quantity with small margin on each
  sale
• Sell small quantity with large margin of each
  sale
• Combination
• Tiny (or negative) margins on loss leaders
• Larger margins on other merchandise
• Everyday low price vs. high-low

Why not medium margins on medium quantity?
22
Two Types of Retail Pricing

• High-low
• High everyday prices
• Frequent sales
• Profit on price discrimination--only some people
  will bother to
• Shop while sale is on
• Switch brands

• Every Day Low Price (EDLP)
• Consistent prices--theoretically no sales, but
  lower non-sale prices
• Typically lower service
• Note that retailers provide for many promotions

23
Strategic Issues

• Importance of convenience
• Increasing power of retailers
• Private label branding
• Lower price but higher margins
• Longer history in Europe

24
Retailing Polarity

• Trend toward either
• Low price--e.g., Food-4-Less, Wal-Mart
  supercenters
• High quality--e.g., Vons Pavilion